Caught in a Funding Squeeze : SBA Overwhelmed by Surge in Demand for Loan Guarantees
Small business owners across the country and particularly in California are facing major delays in receiving Small Business Administration guarantees for their bank loans and may have trouble getting any new government-insured loans in the near future, officials said Tuesday.
Since October, there has been an overwhelming demand for SBA-insured loans and a 40% increase in the dollar amount of loan guarantees issued in the region serving California.
SBA officials said that between now and next October they will be unable to guarantee as much as $500 million in loan requests.
“It’s a very tough situation--there is not enough money to go around,” said Charles Hertzberg, the SBA’s deputy associate administrator for finance and investments. “This is the first time in eight years that we have run out of money.”
Individual loan applications, which once took two weeks to process and approve, are taking up to a month or more, bankers packaging SBA-backed loans said Tuesday at a regional meeting of the National Assn. of Government Guaranteed Lenders.
Rather than lending money directly to small business owners, the SBA encourages banks to make the loans by guaranteeing the repayment of up to 90% of the loan.
The program is popular because most types of small businesses can qualify for the guarantees and business owners can borrow funds at lower rates than through conventional sources. Borrowers can also take up to 25 years to repay funds spent on real estate.
On Tuesday, Hertzberg and other SBA officials met with about 110 lenders to discuss the loan guarantee logjam. The organization is made up of loan officers and others who are responsible for processing and packaging the loans submitted to the SBA for guarantees.
“We are a victim of the success of our lending process and the budget process of the U.S. government,” Hertzberg told the lenders. “This is not a problem that will be easily solved.”
Hertzberg suggested that the banks could help alleviate the problem by taking on more of the risk in making the small business loans. The bankers, however, reacted coolly to his suggestion. When he asked how many lenders would be willing to increase their exposure, only a handful of people raised their hands.
Traditionally, bankers have been reluctant to lend to small business owners because the risk of not being repaid is higher. That is why bankers, who can sell the SBA loans in the secondary market, have embraced the SBA loan guarantee program.
Hertzberg said the SBA is considering several ways to stretch the funds available for loan guarantees.
One way is to reduce the individual loan guarantee limit to $500,000 from $750,000. The limit was increased in October and might account for the recent deluge of loan guarantee applications, Hertzberg said.
He said an additional $200 million may be freed up by redirecting funds from other SBA programs.
The longest shot is to ask Congress for more money, but it is “not likely they’ll do it,” said Hertzberg.
The SBA issued $2.4 billion in loan guarantees to cover about 20,000 loans, during the fiscal year ended Sept. 30, 1988. About 20% of the total amount went to businesses operating in California, Hawaii, Nevada and Guam.
As of last Friday, there were $20 million worth of loans to guarantee, according to John Mattimoe, finance and investment administrator in the SBA’s San Francisco regional office. He said that batch of loans will be processed but “the backlog will continue to increase.”
In the first quarter of 1989, the SBA’s Western region approved guarantees for $165 million in loans, an increase of $47 million over the year-ago period.
Last year, the average SBA loan in the Western region was $202,000, compared to $180,000 in the rest of the country, Mattimoe said.
“It’s rough on the small businessman--he’s the one who has to suffer,” said Tom Brunson, who packages SBA loans for the Government Funding California Business and Development Corp. in Hollywood.
